Harken Energy scandal

The Harken Energy scandal (more appropriately known as the "Harken Energy kerfuffle") refers to a series of transactions entered into during 1990 involving Harken Energy. These transactions are alleged to involve either issues relating to insider trading, or influence peddling. No wrongdoings were found by any investigating authorities although the matter generated political controversy.

pectrum 7 purchase

George W. Bush ran an energy company called Spectrum 7 in the 1980s. In the mid 1980s the oil market was in a terrible slump, with prices lowering daily, the firm was in serious financial trouble until, that year, another company, distressed oil properties specialist Harken Energy, purchased Spectrum 7. Part of the attraction for Harken's management was having Mr. Bush on its team — his father was then Vice-President, he had extensive connections, and knowledge of the oil and gas business. Harken offered Mr. Bush a seat on the board of directors and stock worth about $500,000 at the time. Additionally, Mr. Bush received a consulting contract worth between $80,000 and $120,000 annually.

The Job

1987 and 1988 George W. Bush dedicated himself and much of his energy to the presidential campaign of George H.W. Bush, his father. Fortunes turned for Mr. Bush, and the following year he invested in the Texas Rangers, and investment that will pay off handsomely for him. To pay for this investment, he borrowed a sum of $600,000 dollars; to pay off this loan he sold off his stock in Harken Energy.

Bush's stock sale

George W. Bush sold 212,140 shares of Harken at $4 a share on June 22, 1990, for a grand total of $848,560. Fast forward two months to August 20, Harken announces a larger than expected loss for the previous quarter. But the price doesn't change much, though in the months that followed, Harken's stock price drifted downward to $1.25 by the end of 1990 (the recovers its value and more the following year, however). The sale of stock became public news and there were allegations of improper stock transactions with the use of insider information leveled at Mr. Bush.

Mr. Bush has denied any wrongdoing, nevertheless, an investigation by the United States Securities and Exchange Commission (SEC) is initiated. The investigation focuses on three points surrounding the transaction and the president's actions - Was there prior knowledge of the loss reported in August? Did Mr. Bush attempt to avoid the loss of value of his property based on insider's information? And did the August announcement of a bigger than expected loss lead to a loss of value of property for investors in the company?

EC investigation

The SEC's exhaustive investigation examined thousands of pages of documents. Additionally, and in an unusual move, Mr. Bush waived client-attorney privileges so the attorneys could be questioned, and no doubts remain on the subject. On whether Mr. Bush knew in advance about the losses, the SEC investigators found that "the evidence establishes that George W. Bush was not aware of the majority of the items that comprised the loss Harken announced on August 20." The SEC investigators concluded that the loss resulted from write-downs and expenses that occurred after he sold his stock. Basically an outsider, Mr. Bush did not usually receive the Executive Committee's Weekly Flash Reports on the company's financial condition. In short, concludes an SEC investigative memo, George W. Bush was not particularly informed on the company's finances.

On whether the stock was deliberately sold in time to avoid losing money before bad news was made public, the SEC found that Mr. Bush did not initiate the sale, but was contacted by a stockbroker offering to buy a large block of Harken stock. There is evidence that before selling the stock, company Board Member Bush checked with inside and outside company executives, fellow directors and legal experts on the sale of his stock. The SEC report read "In light of the facts uncovered, it would be difficult to establish that, even assuming (Mr.) Bush possessed material nonpublic information, he acted with scienter or intent to defraud".

On whether the news of Harken's unexpectedly large loss hurt the company's investors, this was quickly discarded after the SEC examined Harken's share price just before and just after news of the loss was made public. Though the price dropped about 20% that day, the move was not immediate, and the price rebounded back to $3 the following day. If indeed the announcement had caused a loss of confidence in the company, SEC investigators reasoned, the stock would most likely have fallen immediately and stayed down. "The conclusion of the Office of Economic Analysis is that, because the price of Harken did not immediately react to the earnings announcement and there is no news that explains Harken's return to its pre-announcement price of $3 on August 21, 1990, the earnings announcement did not provide investors with new material information," the SEC wrote. Moreover, the stock rebounds the next year and hits $8 a share.

Formal troubles

There are also questions about when federal regulators were informed of the sale, and whether Mr. Bush tried to hide this information. Newspapers and internet pundits have alleged that though the law requires prompt disclosure of insider sales, and Mr. Bush neglected to inform the SEC about this transaction until 34 weeks had passed, even though he had broken the law, no charges were filed. This, everyone links to the fact that his father was president.

The reality of the matter is somewhat different. Although these articles usually do not mention it, Mr. Bush was required to file two disclosure forms with the SEC, only one of which was delayed in filing. The "Notice of Proposed Sale of Securities" Form 144, was filed on the day of the sale, June 22, 1990, thereby clearing Mr. Bush of the intent to hide or not disclose. Mr. Bush filed the second form, Form 4, nearly 34 weeks later, in 1991, due to "a mix up with the attorneys". But the information had been disclosed and duly filed in a timely manner via Form 144, so this tardy filing of Form 4 was not viewed as a serious or punishable offense. It appears that late filing of Form 4 was not considered serious by the SEC at the time.

Conclusion

Mr. Bush was cleared of any wrong doing. The Center for Public Integrity said of this episode - "The documents from the SEC inquiry show that Harken Energy engaged in questionable accounting practices as they attempted to stave off a financial crisis in 1989 and 1990. They also show that [George W.] Bush was unaware of much of what was going on in the company. Ultimately, the SEC required the company to correct its financial reports, but concluded there was insufficient evidence to pursue an insider trading case against Bush." [http://www.publicintegrity.org/report.aspx?aid=206]

References

* York, Byron. The Facts About Bush and Harken : The president’s story holds up under scrutiny. National Review Online July 10, 2002 [http://www.nationalreview.com/york/york071002.asp]

* Janick, Herb; Gerlach, Paul; Adelman, Jim. "In the Matter of trading in the Securities of Harken Energy Corp., HO-2518" August 21, 1991 Internal SEC Memorandum [http://www.publicintegrity.org/docs/harken/harken_doc4.pdf]

* The Division of Enforcement. "In the Matter of Trading in the Securities of Harken Energy Corp., File No. HO-2518SEC Action Memorandum, March 18, 1992 [http://www.publicintegrity.org/docs/harken/harken_doc7.pdf]

* "New York Times", "Corporate Conduct of the President: Bush Calls for End to Loans of a Type He Once Received," Jeff Gerth and Richard W. Stevenson, July 11, 2002

* "The Boston Globe", "Harvard fund poured millions into Bush-connected oil firm: Family connection raised as factor", Michael Kranish, Page A12, July 18, 2002

* [http://www.thenation.com/blogs/capitalgames?bid=3&pid=82 1] David Corn's Blog at "The Nation"

External links

* [http://www.sec.gov SEC]
* [http://www.whitehouse.gov/news/releases/2002/07/20020710-11.html#5 White House Statement on Harken stock transaction]
* [http://www.publicintegrity.org/report.aspx?aid=198 A complete Compendium of Documents]
* [http://www.guardian.co.uk/business/story/0,3604,808899,00.html GuardianUK report]
* [http://www.washingtonpost.com/wp-dyn/articles/A3818-2002Oct9.html Washington Post report]
* [http://www.nationalreview.com/york/york071002.asp The National Review Online]